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Brazil Swap Rates Rise on Industrial Output; Real Pares Advance

Brazil’s swap rates rose for a third straight day as industrial output in December exceeded forecasts, boosting speculation that the central bank will increase borrowing costs to curb inflation.

The real pared gains after a government official said in an interview that the central bank will avert excessive appreciation. The currency advanced 0.2 percent to 1.9880 per dollar at the close in Sao Paulo after earlier rising as much as 0.7 percent. The real increased 2.1 percent this week, the most since Dec. 7. Swap rates on the contract due in January 2015 climbed four basis points, or 0.04 percentage point, to 7.99 percent, the highest since Nov. 22.

Brazil’s industrial production was little changed in December from a month earlier after a 1.3 percent decline in the prior month, the national statistics agency reported today. The median forecast of 29 economists surveyed by Bloomberg was for a 0.4 percent drop.

“The market has been very worried about industrial production,” Pedro Ferman, a trader at Maxima Asset Management, said in a phone interview from Rio de Janeiro. “Any little number that comes above expectations is so important to traders and the central bank that there has to be a big adjustment in the market.”

The real rallied to a level stronger than 2 per U.S. dollar on Jan. 28 for the first time since July as the central bank intervened to boost the currency by selling $1.85 billion of foreign-exchange swaps as inflation accelerated.

Tax Break

Yesterday, Brazil removed a 6 percent tax on foreign investment in real estate funds traded on the stock exchange, spurring speculation that inflows will sustain the real even as Finance Minister Guido Mantega said on Jan. 30 that the government is ready to block exaggerated gains.

“The market is questioning what it is that the government wants to do with the exchange rate,” Italo Abucater, the head of currency trading at ICAP do Brasil Ctvm in Sao Paulo, said in a phone interview.

The real also pared its advance today after the government official said that the central bank anticipates no need to roll over $3.15 billion of foreign-exchange credit lines covering four contracts maturing by March 20 if the market remains unchanged. There was no demand when the monetary authority offered $1.27 billion of credit lines two days ago.

Brazil’s currency isn’t a tool to stabilize prices or boost economic growth, said the official, who asked not to be identified.

Inflation Target

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. The IPCA index of consumer prices rose 5.84 percent in December from a year earlier, quickening from the 5.53 percent annual pace in the prior month.

The outlook for inflation is getting worse in the “short term” while the economic recovery was less intense than expected, the central bank said in minutes of its Jan. 15-16 policy meeting published last week.

Policy makers swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

“With the most recent auctions, the central bank showed that it’s changing its focus from using the currency to favor exporters to using it to control inflation,” Reginaldo Galhardo, the head of foreign-exchange trading at Treviso Corretora in Sao Paulo, said by phone. “Mantega’s comments confused the market.”

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